Dear Quentin,
I’m 74 and my wife is 70. We have no debt, our credit-card balances are paid monthly and all taxes have been paid on our funds. I’m writing to ask what you think of my retirement plan. Any advice is welcome.
I averaged $14 an hour over the years I worked at my job. I retired at 43; she retired at 39. We had $1.6 million in cash. We have no children. We are both in good health for our age compared with most.
I have always thought that I did not have any real talents or skills and that the Lord has taken care of me and protected me. I have flown by the seat of my pants. We have always lived on less than what we earned. We have never had an IRA or 401(k) account.
When my wife and I were making $17,000 a year, we went into a realtor’s office to buy a home and laughed and said he had nothing we could afford — not even a fixer-upper. He talked us into buying a 16-unit property in a rough neighborhood.
My wife hated the apartment complexes we had bought over the years, and we sold our last apartment complex, quit our jobs and have been living on our savings and investments since then.
We own two homes free and clear, worth around $1.1 million, and one is rented for $3,000 a month. We have Social Security and my pension of around $40,000 a year. My stock account is around $1.7 million.
I sometimes wonder if I will have enough to last the rest of both my wife’s and my life, and what actions would be best to take now. I think that the best thing I can do is sell my rental home and continue on the same path.
74-year-old Retiree
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You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.
Dear Retiree,
You have never lived on Easy Street. Until now.
Given your multiple earnings during your working years, you are a divine example of the indefatigability of the human spirit. The Lord helps those who help themselves, and you’ve done that. You took a substantial risk early in your life by investing in an apartment building and living modestly in one of those apartments. That has helped you get to where you are today: retired, happy and, I hope, healthy, with a strong spiritual life, two homes that are paid off, and a healthy bank balance.
My immediate knee-jerk reaction to your portfolio is that you have nearly 39% of your total holdings in stocks, which is OK. It’s a conservative approach for someone in their early 70s. But my bigger concern is that you have 36% sitting in cash, which won’t do much good in terms of keeping up with inflation and giving you a return. Let’s assume you’re getting a 7% return on your stocks before inflation — you’re treading water with that cash, even if it’s in a high-yield savings account.
Given that you don’t have an IRA or 401(k) and, therefore, don’t have any required minimum distributions, you have more freedom to withdraw money from various accounts when you really need it. With a $40,000 pension, passive rental income of $3,000 a month, plus two Social Security benefits in your household, in addition to any other money/pensions held by your wife, you’re doing OK. That leaves you to cover food, transport, utilities, Medicare expenses, property taxes and insurance.
You won’t run out of money. Let’s stress test your $1.7 million stocks. (We’ll leave aside your $1.6 million in cash for now, which should be doing something for you to earn its keep.) Taking a conservative 3% withdrawal — $51,000 a year before you pay long-term capital-gains tax — gives you an extra $4,250 per month, perfect if you have a roof renovation, want to insulate your home and/or decide to book a European summer vacation and travel in style. That will last at least until you’re at least 100.
Maximizing your cash reserves
Most advisers suggest a 4% withdrawal ($68,000 a year or $5,667 a month). At this rate, you’re also living a comfortable existence. Historically, this is designed to last retirees about 30 years in typical market conditions and assumes a diversified stock/bond portfolio, timing or pausing your withdrawals so you’re not drawing down money in a down market (also known as the sequence-of-risk returns). The reason to have a cushion is to make room for unexpected market/life events.
You could easily invest another $600,000 of your $1.6 million cash in the stock market in a low-cost index fund, and rely on your $1 million to get you through any emergencies and/or use it for fun money. But that $1 million sitting in a savings account could risk getting slowly eaten by inflation, in the same way that moths chew away at your favorite suit in your closet. Yields on Treasurys are often on par with — or even exceed — CD rates, particularly for short-term options.
Alternatively, invest in short-term Treasury bills, ranging from a few weeks up to a year, medium-term notes (2 to 10 years) or long-term bonds (20 to 30 years) through your brokerage or via TreasuryDirect. A simple strategy is to “ladder” Treasury bills: Divide your investment into portions and purchase bills with staggered maturities, such as 3, 6, 9 and 12 months. This approach provides regular access to your cash and helps avoid the early-withdrawal penalties you would get with CDs.
I have a few questions that you did not ask. Is your income enough to match your expenses? With your $40,000-a-year pension and two Social Security checks, which are partially taxable, I assume you’re in the 12% tax bracket for a married couple, filing jointly. After that, your income moves into the 22% bracket. Do you have an estate plan in place in the likely event that you leave money behind? Without children/heirs, have a think about other relatives and/or charitable organizations.
You’ve done the hard graft at $14 an hour. This should be the fun part.
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